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Citi Has A Craving For Hershey, Upgrades Stock To Buy

Hershey Co’sHSY 0.48% shares are likely to rebound in 2017 due to an imminent announcement of a cost savings program and the rekindling of top-line growth, “on the back of significant, impactful innovation,” Citi’s David Driscoll said in a report.

He upgraded the rating on the company from Neutral to Buy, while reducing the price target from $115 to $110.

Cost Savings Announcement

Driscoll expects Hershey to announce a cost savings program that would yield potential savings between $175-$300 million. The program, encompassing both supply chain and SG&A costs in North America and China, would likely result in operating margin expansion of 250-400bps.

Even after assuming a 100bps reinvestment into the business, the potential operating margin expansion is at 150-300bps from 20.2 percent in 2016. “Our above consensus EPS estimates assume +100bps expansion by 2018, leaving considerable upside to our estimates from the anticipated restructuring program,” Driscoll wrote, adding that each +100bps would add 25 cents per share or 6 percent to EPS.

Impactful Innovation

The analyst mentioned 3 major innovations:

Cookie Layer Crunch

Big Kat

Reese’s Pieces PB cup

These are expected to drive 3 percent sales growth at Hershey starting in Q3, following a couple of lackluster year. Driscoll projected $180 million in revenue contribution from these innovations.